It is tempting, and dangerous, to rubber-neck a motorway car crash. Watching public violence – and bystanding – is also socially irresponsible. Europeans observing the US ‘near miss’ constitutional crisis have a comparable choice: be spectators or show responsibility
I get no pleasure from having been right about this preventable surprise. As the venture capitalist Michael Moritz has noted, many warned of the risks, but without success. Many executives preferred to support Donald Trump because they liked his policies.
The next mistake will be to get lost in paralysis by analysis. This is a teachable moment and all players, investors included, must use it.
EU investors must see how much more dysfunctional Europe would be with a US style arms race in political spending? According to the Center for Responsive Politics, spending by ‘outside groups’ – a primary vehicle for attack ads and disinformation that fan polarisation – rose to $2.9bn in (€2.4bn) 2020 – 56 times higher than in 2000.
Business-related contributions in 2020 accounted for about 60% of total political donations. Corporate lobbying dwarfs these contributions. Put simply, the US corporate-political business model is broken and given the US’s extra-territorial impact, this is a material issue for EU investors.
Widespread corporate political activity is relatively recent starting in the late 1970s. Whilst short-term and narrowly-defined return on investment has been advantageous for corporations, and their executives, both Pew Research and Public Agenda have found that a leading cause of distrust in politics and belief that the system is ‘rigged’ is the view that politicians are bought by corporate America. This is held across the political spectrum. As Harvard economist Rebecca Henderson argues in January’s HBR, the costs are significant. CEOs are facing heightened uncertainty, angry employees and outraged/anxious customers.
One reason why US CEOs support the Republicans is because of corporate and personal tax breaks. But long-horizon investors should be more concerned about the whole portfolio (the market beta) and also the quality of life for beneficiaries than tax implications. Both depend on addressing inequality, the climate and biodiversity crises, decaying infrastructure, and failing healthcare and education. Hopefully US CEOs will be at least curious about the “universal investor” model. At the minimum, EU investors should understand the worldviews of investee company CEOs and raise alternative perspectives on this issue.
So what are the specific ‘asks’?
• Have you formally acknowledged that Joe Biden and Kamala Harris won and if not, why? There will be no unity or healing without this. Not convinced? Read Congresswoman Liz Cheney’s rebuttal of objections to the certification of Joe Biden’s election win. Yes, the media should have done a better job of explaining, but we are where we are.
• Have you considered what else you, personally, can do? One option: support Leadership Now’s Five Immediate Actions to Respond to the 6 January Insurrection. Or support Prof Jeffrey Sonnenfeld of Yale, who is helping CEOs to come together to take action. Meaningful change depends on enough CEOs working together and also aligning their own personal giving with these new standards.
• Will your firm be placing an indefinite stop on funding legislators who questioned the election results, at least until these officials publicly apologise? And asking your trade associations to do the same? This should be at both the federal and state levels. Corporate giving at the state level, which is sometimes directly from corporate treasuries can be partisan – as much as 80% plus goes to Republicans.
The good news? CEOs are waking up. Elizabeth Doty, director of the Erb Institute’s Corporate Political Responsibility Taskforce at the University of Michigan, is working to help companies act, whilst also rationalising standards. She says: “CEO’s recognise there is just a short window of opportunity here. By taking action to support strong civic institutions, business voices can help create a tipping point and rebuild public trust for decades to come.”
The New York Times acknowledges that naby cimpanies are pledging to withdraw funds from Republicans who refuse to acknowledge Biden’s victory. But several are building in wiggle room with language like “weigh heavily” or announcing temporary pauses. Why enabling sedition is not a deal breaker and why they cannot differentiate between responsible versus irresponsible Republicans is unclear. A blanket, temporary pause at a time when donations do not normally happen is not convincing.
The above should bring down the fever but the highly dysfunctional US business-political funding model is screaming out for systemic attention and CEOs need to treat the causes of the infection, even though instant cures do not exist.
Companies could adopt the IBM approach. IBM has never given money to politicians, yet its CEO was still invited to the Trump White House. Or join former Delaware Chief Justice Leo Strine and co-founder of the Global Business Network Peter Schwartz to advocate limits on political spending (the American Promise Statement of Principle). This negates the question ‘How much have you contributed?’ Or the Center for Political Accountability’s Model Code of Conduct. Or the founder of The Vanguard Group, John Bogle’s 2011 proposal requiring shareholder consent for political spending.
Corporations will hold back if major investors are not supportive. Sadly many investors are making the same mistake as other US companies and financial sector trade groups and professional bodies have been particularly slow to act. For example, the American Bankers Association – one of the top donors to Republicans who contested the election result – reportedly has no plans to pause donations.
Today the focus is on the US and the dominant part of the Republican party. According to democracy scholars, the party “has retreated from upholding democratic norms in recent years” with rhetoric that is “closer to authoritarian parties, such as AKP in Turkey and Fidesz in Hungary.” But the challenge is global. Cas Mudde, a Dutch political scientist who focuses on political extremism and populism, says almost two billion people (25% of the world’s population) live under democratically elected far-right leaders and Europe (Hungary and Poland) isn’t exempt. This is no reason to look away from the US. Rather investors should address the global challenge of autocracy.
Investors based in democracies should prioritise safeguarding existing democracies. And without understating the challenges, some investors believe they can be part of the solution even in countries like China, Russia or Saudi Arabia.
For Bill Browder, CEO of Hermitage Capital and head of Global Magnitsky Justice campaign, the choice is clear: “Avoid investing in countries run by dictators and autocrats. You have no recourse if you get ripped off. That gives a strong incentive for locals to rob you blind.”
If the US becomes a focus for divestment, investors will have no one but themselves to blame. Now is the time for assertive engagement.
Raj Thamotheram is a fellow of Niftys